Impact Investment Through Listed Stocks

Standard Life Investments has a long track record in managing sustainable investment funds, but its latest venture is a step forward in the field.
The Standard Life Global Equity Impact Fund will aim to generate measurable positive social and environmental impact alongside financial returns.

“There is an increasing body of investors asking “can we put our capital to work to benefit the environment and society?”” explains Dominic Byrne, co-manager of the fund, alongside Sarah Norris.

The fund was originally developed in response to a query from an existing institutional client, but will be available to the whole range of investors, from pension funds and private banks to retail investors.

Mr Byrne has seen the concepts of responsible investment evolve from ethical funds, which used mostly negative screening or exclusion, through the integration of ESG analysis in sustainable investing “which looks for companies that are running themselves sustainably”.

“Now we are saying to the companies: we really care what your products are and what they are doing.” That is impact investing.

Although impact investment as a concept is relatively well established, it is usually achieved through private debt, venture capital or private equity, rather than listed equities.

As a pioneer, Standard Life Investments has had to develop the concept and design the product from scratch. It has used the UN’s Sustainable Development Goals (SDGs) as a framework to develop its own impact process and analysis.

Only companies whose products or services are explicitly targeting the problems that stand in the way of the SDGs (such as making clean water available to all, or improving healthcare) can be included in the portfolio.

Using this framework, Mr Byrne and Ms Norris will select a high-conviction portfolio of 35-60 stocks. Once a company is in the portfolio, its performance will be measured against a set of key performance indicators and reported in the fund’s annual global impact report, alongside the financial performance.

Reporting is very, very important and very, very difficult,”
says Mr Byrne. “There is no external data source - we
haven’t found anyone who can do it.

Mr Byrne

Proprietary assesment methodology

So Standard Life Investments is doing the monitoring work itself, while aiming to provide sufficient transparency to maintain credibility. The SDGs themselves have a set of about 120 key performance indicators, and Standard Life is using between 40 and 50 of these, which can be meaningfully used at the corporate level, to assess the impact of its portfolio companies.

Even the most highly principled investor will need to make a financial return, however. The fund will be measured against the MSCI ACWI (All Country World Index), so the promise is of performance unimpeded by the principles behind the fund.

The only concession the fund managers ask investors to make is to judge the performance over a longer horizon than is currently the trend. “Because the impact case will take years to play out, turnover in the portfolio should be relatively low. So don’t think about performance on a quarterly basis, think about a five-year horizon,” says Mr Byrne.

By their nature, some sectors are entirely excluded from the fund. These are: defense, tobacco, oil and gas, and extractive industries. None of these are judged to offer any solutions to the problems of the SDGs.

These apart, the fund’s sector allocation is broadly in line with the index. Financials, healthcare, industrials and telecoms are represented. Mr Byrne says the fund should have an advantage over the medium to long term by using the SDGs, because it will position the portfolio in anticipation of future regulatory initiatives.

We want to be where we think governments are going to be encouraging companies to be in the future,” he says. “Companies are already starting to say ‘how can we better align our corporate future with the SDGs?

Dominic Byrne

He estimates the capacity of the fund to be “measured in the billions”, so this is no niche product, but something intended to help change the world.

It’s not going to be done by listed equity alone, but
we’ve got a part to play,” says Mr Byrne. “If we can make
a small shift in capital in listed equity, that will make a
difference.